Economics

Israel Turns the Screw on Tycoons

Anger at close ties between government and business has spurred tighter regulation.
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A protester holds a placard bearing portraits of (from left) Israeli Prime Minister Benjamin Netanyahu, Interior Minister Aryeh Deri, and businessman Isaac Tshuva on Feb. 3, 2016, in front of the Supreme Court in Jerusalem where a hearing took place on a contentious natural gas deal.

Photographer: Menahem Kahana/AFP/Getty Images

For years, Shaul Elovitch lorded over Israel’s communications industry like an emperor. The 69-year-old Polish émigré controlled the country’s largest provider of fixed-line phone and internet service; he owned a news website read by millions; and he was a top investor in the nation’s only satellite TV provider. It didn’t hurt that his chum Benjamin Netanyahu had his back.

All that changed in November, when authorities recommended Elovitch be indicted for securities violations at Bezeq Israeli Telecommunication Corp., where he’s the top shareholder. Investigators say Bezeq executives helped Elovitch boost the price Bezeq paid for his satellite TV operator and colluded with the industry regulator, appointed by Netanyahu, to shape rules to the company’s benefit. Investigators haven’t yet indicted Elovitch, and he denies any wrongdoing. But three major banks have asked an Israeli court to break up his holding company, citing concerns about debt. And on Jan. 16, activist investor Paul Singer said he had bought shares in Bezeq and demanded that board members with ties to Elovitch step down.

A Bezeq store in Tel Aviv, Israel.
Photographer: Ahikam Seri/Bloomberg

Elovitch is the latest Israeli tycoon to suffer from increased scrutiny over close ties between government and industry. As the country shifted away from its socialist roots in the 1980s, a select group of businessmen used their political connections to scoop up state assets and keep competition at bay. Monopolies and oligopolies flourished, driving up prices for everything from housing to groceries. The Organization for Economic Cooperation and Development in 2016 said the cost of living in Israel was 20 percent higher than in Spain and 30 percent higher than in Korea, though all have a similar per capita gross domestic product.

Six years ago hundreds of thousands of Israelis took to the streets to protest high prices. Government officials responded by scapegoating the wealthiest and stepping up regulation. “There are efforts to open up the economy everywhere you look, which is dangerous for entrenched interests who have benefited from a lack of competition,” says Manuel Trajtenberg, a former Labor Party legislator who led a committee to improve social welfare. “They are on the losing side.”

Nochi Dankner controlled Israel’s biggest mobile phone operator, its leading supermarket, and a top insurance company but struggled to pay his debts after the government wrote new rules for those industries. A court found that Dankner, with his empire under threat, sought to artificially inflate his company’s stock price before a planned equity sale by prodding associates to buy shares. In December 2016 he received a two-year jail sentence for securities fraud; Dankner, 63, is appealing the conviction. Idan Ofer, 62, oversees an industrial conglomerate that includes the country’s largest oil refinery, fertilizer maker, and shipping company; its value has fallen by more than half since ministers raised taxes and blocked the sale of his chemicals unit. Energy mogul Isaac Tshuva, 69, was ordered to relinquish control of a leading insurer and scale back his dominant position in offshore gas production in accordance with new rules aimed at igniting competition in both industries.

As Elovitch watched his fellow tycoons grapple with investigations and tighter regulation, his own vulnerabilities became clear: Any drop in Bezeq’s profitability could bring him down because of the mountain of debt he carries from a 2010 deal to take control of the carrier. After Israel’s telecommunications regulator sought to challenge Bezeq’s near-monopoly, Netanyahu in 2015 replaced the agency’s administrator with his former chief of staff, Shlomo Filber.

Citing Netanyahu’s close ties to Elovitch, Israel’s attorney general in 2016 demanded that the prime minister—who simultaneously served as minister of Communications—recuse himself from any decisions regarding Bezeq. Netanyahu complied, but the Israel Securities Authority alleges that Filber allowed Bezeq executives to craft industry regulations, including a proposed rule change that would have saved the company roughly $100 million annually. “It always disappoints us to find that controlling shareholders in public companies forget that the shareholders in the public are their partners,” says Shmuel Hauser, who led the probe before stepping down from ISA in December.

Dror Arad Ayalon, an attorney representing Filber, says all of his client’s contacts with Bezeq were in line with his duties as a regulator. Netanyahu isn’t a suspect in the Elovitch matter, but he’s being investigated in at least two other cases of alleged influence peddling involving prominent businesspeople.

Elovitch laid the foundations of his empire in 1985 when he and his brother bought Eurocom, a phone manufacturer and importer of Panasonic electronics gear. In the 1990s, Eurocom became the Israeli distributor of Nokia handsets—which provided ample cash to buy stakes in satellite TV, internet services, and radio companies. Elovitch took a controlling interest in Bezeq—Israel’s onetime phone monopoly—in 2010, for 6.5 billion shekels ($1.7 billion), more than two-thirds of which came from banks.

Although it was expected to take at least four years for Bezeq to generate sufficient dividends to pay off the debt, the company seemed a good bet. After all, it was Israel’s only provider of TV, internet, and telephony. But Elovitch hadn’t counted on new regulations that would open the market and bring down prices. Since 2012, Israel has gone from three cellular operators to five and from two providers of pay-TV and high-speed internet to four. Bezeq’s profit has fallen by a third as the average mobile phone bill has plunged more than 80 percent.

With Bezeq’s dividend payment falling far short of what Elovitch had expected, he faced a cash crunch. He sought to create breathing room with a $285 million deal to sell Space Communication Ltd., a Eurocom unit that funds and launches satellites. But those hopes evaporated after a rocket carrying a Spacecom satellite exploded in 2016. With increasing competition under the new regulatory regime, Bezeq’s profits are still falling as it continues to lose customers.

And that’s likely to send Elovitch down the same path as other Israeli industrial titans who’ve lost control of their empires. “The era of the tycoons is over for the next decade, at least,” says Yedidia Stern, a board member of Bank Leumi Le-Israel Ltd., which isn’t a Eurocom creditor. “Israeli banks aren’t going to finance empty deals anymore.”

(Adds Paul Singer investment in second paragraph.)
    BOTTOM LINE - Elovitch’s struggle to save his telecom empire illustrates the difficulties Israeli businesses face as the government yields to voter demands for increased competition.
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